Changes in BOT road contracts may not jumpstart private investment

Changed bidding and contractual guidelines for build-operate-transfer (BOT) road contracts are being finalised but big construction companies might, it is believed by observers, not be in a hurry to return to this segment.

As for smaller players, they are occupied with hybrid annuity projects.

The decisive factors in attracting private investment will be the stretches offered for bidding and projected traffic density. The new draft norms have been brought in to encourage private participation in BOT. Large highway developers (L&T, Hindustan Construction) had started avoiding these contracts, over delayed return on investment, rigid concessionaire agreements and legal disputes with governments.

According to the draft model concessionaire agreement, the National Highways Authority of India (NHAI) and the concessionaire would agree that in a financial default, the lender or banks can invite, negotiate and procure offers, either by private negotiations or public auction or tenders, for takeover and transfer of the project highway.

“These are prospective guidelines, not retrospective — the bigger issue is their application. It will encourage private participation but the larger issue is overall scepticism in the market in the short term,” says Kushal Singh, partner at consultancy Deloitte India. There is also market risk and a healthy traffic forecast. Such factors will outweigh the benefits of new BOT guidelines for big-size private players, he feels.

According to a report from ratings agency ICRA earlier this month, risk averseness at road developers has increased over recent years. “Even today, many developers’ balance sheets cannot support huge equity investments towards BOT projects. Further, the transportation sector is undergoing transformational change, with alternate modes, viz., dedicated (rail) freight corridor and inland waterways, which would result in a modal shift from road to these modes over the medium to long term,” it said.

The road network itself, it adds, is changing significantly, with some of the economic corridors under the Bharatmala project competing with existing stretches. “Overall, these factors would make traffic forecasting extremely challenging... This year is likely to be one of muted awards, due to changes in the award mix, resultant procedural delays and weak private sector interest,” it added. ICRA expects awards in 2020 to remain in the range of 3,700-4,000 km.

Source: ICRA

The new guidelines from NHAI offer a ‘harmonious exit’ clause, essentially to allow lenders to transfer a stuck project to another construction company if the first one is unable to deliver on time. If the authority has an objection, it will within 15 days from the date of proposal made by the lenders’ representative give a reasoned order, goes the draft BOT agreement.

The amendments have been proposed after deliberations with the Ministry of Road Transport and Highways, Department of Economic Affairs, Ministry of Finance, and NITI Aayog. Other changes proposed in the model concessionaire agreement are on capping of liabilities of either party through the term of the agreement, tightening of conditions precedent prior to declaration of appointed date and in the dispute resolution mechanism.

Also, changes incorporated from recent updates on model agreements in other types of contract, such as hybrid annuity and engineering-procurement-construction. Another factor that could impact private participation is the high interest outgo due to leveraged balance sheets, which will continue to exert pressure on net profit. 

According to the ICRA report, muted awarding activity is likely to impact the order book accretion, resulting in a depressed order book to billing ratio. As a result, revenue visibility is likely to lessen.